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For California and its disastrous attempt at energy deregulation, the bankruptcy of utilities giant Pacific Gas & Electric Co. and near-collapse of Edison International hogged headlines. What’s gotten a mere puff of publicity, however, is the bankruptcy of the California Power Exchange, or PX, which has proven as thorny and far-reaching in its implications as those higher-profile cases. At stake is more than $2 billion worth of claims. The case involves government seizure, disputed jurisdictions and competing reorganization plans. “This is the most complex case I’ve ever worked on,” says the creditors’ committee’s lawyer, Marc Cohen of Kaye Scholer in Los Angeles. PX was the exclusive, blind intermediary through which electricity was bought and sold during deregulation. Power generators and marketers sold power through auctions on PX to utilities PG&E, Southern California Edison and San Diego Gas & Electric Co. There were spot sales and forward contracts. While the exchange itself had no ability to manipulate energy supply or demand, it was tagged as one mechanism that contributed to an all-but-dysfunctional market. On Dec. 15, 2000, the Federal Energy Regulatory Commission issued guidelines that removed the exchange’s trading exclusivity, prohibited certain kinds of trades through the exchange and imposed a soft cap on contract prices. “This was the break point,” says Lynn Miller, the exchange’s CFO. From mid-December to early January 2001, exchange business dried up. Auctions all but ceased. Southern California Edison defaulted on payments to PX worth $215 million. PG&E, too, defaulted. The exchange’s bond rating plummeted. Power politics engulfed the PX. After legal wrangling, a Superior Court judge suggested Gov. Gray Davis could seize collateral forward contracts worth as much as $1 billion for bulk power that had been sold to the utilities via the PX but not yet delivered. Davis did so; a month later, in March 2001, the exchange filed for Chapter 11 protection. Creditors and debtors alike find themselves battling on several fronts, and not just with each other. The battles include: • The governor’s commandeering order. On behalf of the suppliers, Cohen succeeded in removing a state agency called the Victims Compensation Board from the case. (The board is designed for routine claims leveled against the state and not complex bankruptcies.) Now suppliers are going forward with a lawsuit against Davis for the seizure of the $1 billion worth of collateral. • PX’s own stash. The exchange now holds $1 billion in collateral from former participants. In addition, the PX holds some $1.2 billion in settlement clearing funds. Creditors understandably want these disbursed. • The debtor as creditor. PX finds itself the second largest creditor in the PG&E bankruptcy, with about $1.7 billion in claims. • FERC. The body has been mulling refund formulas for overpaying utilities. Talks are ongoing, said a spokeswoman. But the PX doesn’t want to disburse the funds it holds until refund schedules are set, figuring it’s as much payee as payer. So far, FERC has agreed. • Competing reorganization plans. The creditors’ committee filed in November a reorganization plan that was opposed by PX as well as by the utilities. Miller claims the creditors’ plan failed to insure the neutrality of the PX, which filed its own plan in April. • Voting creditors. Lawyers for PX argue that when it comes to $1.2 billion in settlement clearing accounts, the PX, not suppliers, can vote on the reorganization plan. The suppliers “vehemently disagree,” Cohen says. Meanwhile, the entire case could find itself in a jurisdictional tug-of-war between the bankruptcy courts and FERC, just like the one involving the Federal Communications Commission’s right to strip wireless spectrum licenses from bankrupt NextWave Communications. That case’s fate now rests with the U.S. Supreme Court. Copyright (c)2002 TDD, LLC. All rights reserved.

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